I HOLD THIS TRUTH TO BE SELF-EVIDENT, THAT A DEBT CRISIS CANNOT BE RESOLVED WITH MORE DEBT

Wednesday, April 8, 2009

Paradigm Shift Now!

I just read an article in Reuters about what President Obama should do to get the economy "back on a solid footing". Here's their analyst's advice: "...convince Americans to spend now and save later.." Wow! Talk about living in a shelterd past under a shaped Shrub..

Yeah, sure - let's all go shopping in the face of adversity; and this will boost GDP, jobs, income, asset prices and - of course - the ability to borrow ever more to keep the Permagrowth cycle going for ever and ever. Some analysts' thoughts never break free from Groundhog Day, do they? - no, scratch that: most analysts never do. Their exhortations to spend, spend, spend (more accurately: borrow, borrow, borrow) are based on the religious conviction that the world knows no physical boundaries, that resources are supplied as needed because we just demand them. It's only a matter of Adam Smith setting appropriate scarcity prices by His Invisible Hand, don't you know?

How ludicrous!

But, you know what? Forget the big picture for a moment. Let's just only look at the personal saving rate. Does anyone have any doubt that saving less and less, until America's households began to liquidate savings to consume, was a major underlying cause of the current crisis?

Oh, but I forgot: the New Economy and technology will save us. More strawberries and cream will appear just because we sell more tickets to Wimbledon through the Internet. Truckloads of lumber and pails of nails shall materialize at building sites because the house was designed by AutoCAD instead of pencil and paper. Ahuh..

And dollars will rain down from helicopters to pay for all these, people merrily collecting them in baskets (or is it wheelbarrows?) to exchange for such trifles as food, clothing, fuel and shelter. Oh yes, and spaghetti grows on trees, so if you believe any of the above just "place a sprig of spaghetti in a tin of tomato sauce and hope for the best".

But if you do not, do the exact opposite of what Ms. Emily Kaiser (the Reuters analyst) suggests. Save now because the borrow-spend-grow paradigm is shifting fast. How do I know? Because Mr. Obama says so, and he is the President of a country that accounts for a quarter of the world's consumption. Here's what he just said during his trip to Europe:

"In order for growth to be sustainable, it can't be based on speculation, it can't be based on overheated financial markets or overheated housing markets, or U.S. consumers maxing out on their credit cards, or us sustaining nonstop deficit spending as far as the eye can see. The whole point is to move from a borrow-and-spend economy to a save-and-invest economy."

Listen to the man. Oh and I trust that Michelle is not planting spaghetti trees in the back of the White House, either...

17 comments:

'...religious conviction that the world knows no physical boundaries, that resources are supplied as needed because we just demand them."

I think the unspoken assumption in that point of view is that those who can't exercise "effective" demand (the only kind that counts) will simply die off leaving sufficient supply for those who can pay for it.

@Spaghetti TreesI doubt Michelle will be doing much planting of anything herself, the grounds keeper will be doing all the digging and hoeing; that woman doesn't know how to hold a shovel.

I remember the president of the United States,a country that accounts for a quarter of the world consumption, telling us a few years ago to go to Disney world, as this was the best way to fight terrorism.

Isn't the savings rate chart skewed as it does not include participation in IRA's, 401k's and 403b's?

Bottom line though: What is good for the macro economic environment is bad for the individual and what is good for the individual is bad for the macro economy.

I want to point out a seemingly (to me, anyways) contradiction in your analysis of the general direction of the markets.

What you are suggesting that consumers do is become thrifty. At the same time, you have been hinting that now is a good time to start investing in the stock market. However, the Paradox of Thrift would indicate that all of this consumer savings is going to lead to a severe downturn in business activity. We are in a vicious economic cycle.

As the stock market, in theory, is forward-looking (by six months on average, I am told), it should rebound before the overall economy. However, I don't see the situation improving that quickly.

Little old naive me, I thought that SAVING money was not particularly good for the economy.It gets money out of circulation.The economy works when money is circulating.But it certainly is true that the idea NEVER was (in my book, at least...) to spend money that you didn't have, on unlimited credit. I don't know if I consider myself to be a particularly thrifty person. I buy when I feel like it, and try not to get TOO caught up in the mindset, if I don't NEED it, then I shouldn't buy it.I don't believe in fanatacism of any sort...

You got a serious chuckle out of me with the sprig of spaghetti in the tin of tomato sauce line. Hope you don't mind, but I'm gonna steal that, and use it at an opportune time in the near future.

And on that topic, I've a fond memory of riding to Bear mountain and finding a bush of perfectly ripe blackberries. I immediately started nibbling on them, of course. But. The looks I got while doing so were priceless. It just so happens that bear mountain is the nearest "real nature" refuge to NYC, and the place happened to be swarming with lifelong city-dwellers "roughing it" for a few hours. And when they saw me... eating... things... from a BUSH?! Well, lets just say it was one of the few times I was happy to have hillbilly in my blood.

Now, Deb,

Sorry, but I didn't catch your comment to me till now. So.. (1)-yes they were. (2)- I don't think I'm in a position to answer that unbiasedly, but... most likely. (3)- I knew, but that wasn't the point. I like to argue is all, and it sounded fun. (4)- It can still be fun, only it's gonna take a little while to re-arrange.

I think that this takes us back to the Church's debates on usury once again, Hell.There is investment, and investment...No risk investment for the investor is NOT investment. And I think that we have been operating under the totally FALSE assumption that there should be NO risk for an investor. (Just like we have been trying to hide our heads under a pillow about the general fact of life of risk EVERYWHERE in the world.)Granted, I'm not sure that I understand all the implications of the difference, I can be very obtuse about money, as I'm sure you have noticed, lol...SS, I have discarded Freud's theories about money and toilet training. I think they are outlandish, useless, good for producing uncomfortable laughs in polite society, and especially COUNTERPRODUCTIVE... And THEY don't suit ME, so...On the questionable point of my authority to discard Freud's theories, I will say that I allow myself this leisure because 1) they do not correspond to MY observations and life experiences, and 2) I am alive, and Freud is not... which is as good a reason as any, and better than most.Cotton, thanks for your response, but reading it, I forgot what my questions were... (too lapidary, mon cher)

Nothing prevents anyone to lend gold serving interests. This is a non-argument. It just points out how invalid most long-term lending schemes are. The money will be made back. Certainly not the value.

By the way US would certainly take advantage of a bit more hoarding. I do not mean Wal-mar stuff.

The risk of precious-metal hoarding is serious to-day. But in case of effective currency destruction by the Fed, we can expect a much more modern and damaging equivalent to hoarding, speculation on raw material and energy markets.

The compulsive gold hoarder is certainly considerably less damaging to the monetary and economy than the wheat, rice or oil speculator trying to corner consumption on Chicago or London exchanges...

Gold bugs have become a nearly immaterial pest on society - and a good thing, too. I completely and unequivocally agree with Keynes that the monetary gold standard was a barbarous relic. Good riddance.

This does NOT mean that unchecked fiat money creation is a good thing, of course. Entirely the opposite as the title of this blog clearly implies.

For the future, I believe there is a nexus between fiat monetary economics and the sustainable technologies that can be very well managed to boost and accelerate the transition from Permagrowth to Sustainability.

"people see in me what they want to see"-Barack Obama in his book and in interviews about his book.

Obama has already repreated the nonsense utterred by Bush II after 9/11: we need people to go shopping & spending. He also said we need to buy more Buicks.

Hell, Obama will not be your torch-bearer.

The movement you preach away from perma-growth will not be led from the White House or Congress; if/when it happens it will be the grassroots leading our 'leaders' ...or it may sinply never happen and some Jared Diamond of the future will right about the 7 billion idiots of earth circa early 21st century.

@ Hell- if you would be kind enough to clarify the following, I sense I am not alone in this confusion.

IF we had been on the greenback and had reached our current debt levels (again IF), wouldn't the rigidity of a Greenback standard (based on energy and energy growth) have been every bit as rigid as a gold standard and been every bit as likely to cause GD II as you claim the inflexibility of a gold standard caused GD I in the 1930's?

(If I understand correctly, the main thrust of your view is we would never have gotten ourselves into the current mess we find ourselves in had we been on a Greenback standard. Or do I misunderstand you?)

And regarding markets: The Nikkei 225 fell far more than 52% when their bubble burst. The Nikkei was 37,188 in Jan 1990 and hit 7800 in April 2003 before coming back to around the 8900 where it is today? This is a fall of much more than the 50% we have so far seen in major US indexes?

Was our bubble bigger or smaller?

And how has the Fed behaved differently than the B of J? Are we engaging in EVEN MORE QI than the japanese did?

About Me

I was educated as a chemical engineer but spent almost my entire career in finance, particularly in money, FX and bond markets. The name stands for Hell-as-IOUs and the picture points to Quixotic endeavors.